Deluxe Reports First Quarter 2019 Financial Results

ST. PAUL, Minn.–(BUSINESS WIRE)–Deluxe Corporation (NYSE: DLX), a trusted, technology-enabled solutions
provider, announced its financial results for the first quarter ended
March 31, 2019. Revenue was within the Company’s previously disclosed
outlook range of $490 to $505 million. Adjusted diluted EPS, calculated
consistently with our prior year methodology, was $1.14, compared to the
outlook range of $1.05 to $1.15.

1st Quarter 2019

1st Quarter 2018

% Change

Revenue

$499.1 million

$491.9 million

1.5

%

Net Income

$41.2 million

$63.3 million

(34.9

%)

Adjusted EBITDA(1)

$113.7 million

$121.6 million

(6.5

%)

Diluted Earnings per Share (EPS) – GAAP

$0.93

$1.31

(29.0

%)

Adjusted Diluted EPS – Non-GAAP(1)

$1.54

$1.60

(3.8

%)

(1)

Note that this presentation of Adjusted EBITDA and Adjusted Diluted
EPS differs from the amounts reported in the prior year as
management determined that excluding additional items when
calculating these non-GAAP measures would be helpful to investors in
analyzing our results. A reconciliation of Adjusted EBITDA and
Adjusted Diluted EPS are provided later in this release. Certain
Items are excluded in arriving at these amounts, including, but not
limited to the following: asset impairment charges. restructuring
and integration costs, CEO transition costs, share-based
compensation expense, acquisition transaction costs, certain
legal-related expense, and gain/loss on sales of businesses and
customer lists. Adjusted Diluted EPS also excludes acquisition
amortization.

First Quarter 2019 Highlights

Financial Services (FS) revenue increased 9.8% compared to the prior
year driven by the results of the REMITCO acquisition in August 2018.
FS revenue was negatively impacted by the continuing decline in
checks, as well as a decline in treasury management revenue, excluding
the impact of the acquisition.

Small Business Services (SBS) revenue declined 1.0% compared to the
prior year driven by the continuing decline in checks and forms and
the impact of one less business day this year. SBS revenue benefited
from the results of three tuck-in acquisitions in 2018 and price
increases.

Marketing services and other solutions (MOS) accounted for 43.0% of
total revenue, checks accounted for 40.3% of total revenue and forms
and accessories accounted for 16.7% of total revenue.

Net income decreased $22.1 million year-over-year. Adjusted EBITDA
decreased $7.9 million year-over-year due primarily to the continuing
decline in checks and forms, partly offset by our continued focus on
cost reductions, as well as SBS price increases.

Cash provided by operating activities for 2019 was $45.4 million, a
decrease of $35.4 million compared to 2018 driven by the payment of
certain legal-related expenses, the timing of accounts payable
payments, and the continuing decline in checks and forms, partly
offset by benefits from our cost savings initiatives and lower income
tax payments.

The Company repurchased common stock in open market transactions
during the first quarter for total consideration of $50.0 million.

At the end of the first quarter, the Company had $946.0 million of
total debt outstanding under its revolving credit facility.

“I am pleased with our first quarter performance which was in-line with
our expectations,” said Barry McCarthy, President and CEO of Deluxe. “We
have made substantial progress in evaluating our operations to ensure
Deluxe is well positioned for the future. What is clear is that Deluxe
has an impressive base of existing customers, extensive catalog of
products and services and a strong financial structure, all of which we
expect will drive our revenue growth. Today we are announcing our
strategic framework to transform Deluxe into a trusted,
technology-enabled solutions provider. We believe that the combination
of our compelling core competencies and assets, with our new
go-to-market strategy will deliver significant shareholder value over
the long-term.”

McCarthy continued, “We are excited about transforming the Company from
a check and forms printer into a “New Deluxe” and are focused on driving
improved operating performance and financial results. Later in the year,
we will begin realigning our business into four primary areas: payments,
cloud, promotional products and checks, which will provide us with
opportunities in the enterprise, small business and financial services
spaces. As we move forward, we intend to maintain our recurring revenue
streams, scalable business model, attractive cost structure and data
rich-businesses. With our new go-to-market strategy and integrated
operations, we will run a more streamlined and efficient sales process,
resulting in more cross-sell opportunities across the organization.”

Second Quarter 2019

Current Outlook(4/25/2019)

Revenue

$490 to $505 million

GAAP Diluted EPS

$0.95 to $1.05

Adjusted Diluted EPS

$1.55 to $1.65

Full Year 2019

Current Outlook(4/25/2019)

Prior Outlook(1/24/2019)

Revenue

$2.00 billion to $2.05 billion

low-single digit increase over 2018

GAAP Diluted EPS

$4.33 to $4.63

increasing over 2018

Adjusted Diluted EPS

$6.65 to $6.95

slight increase over 2018

Operating Cash Flow

$325 million to $340 million

—

Capital Expenditures

approx. $75 million

—

Depreciation and Amortization

approx. $60 million

—

Acquisition-Related Amortization

approx. $75 million

—

Free Cash Flow(1)

$250 to $265 million

—

Effective Tax Rate

approx. 25%

—

(1)

Free cash flow is calculated as net cash provided by operating
activities less purchases of capital assets. Information regarding
our use of the free cash flow measure can be found in note (2) to
the consolidated condensed statements of cash flows presented later
in this release.

Earnings Call Information

A live conference call will be held today at 11:00 a.m. ET (10:00 a.m.
CT) to review the financial results. Listeners can access the call by
dialing (615) 247-0252 (access code 2469334). A presentation also will
be available via a webcast on the investor relations website.
Alternatively, an audio replay of the call will be available on the
investor relations website or by calling (404) 537-3406 (access code
2469334).

Deluxe is a trusted, technology-enabled solutions provider for
enterprises, small businesses and financial institutions offering a
range of solutions to help customers manage and grow their businesses.
Approximately 4.8 million small business customers access Deluxe’s wide
range of products and services, including incorporation services, logo
design, website development and hosting, email marketing, social media,
search engine optimization, and payroll services along with customized
checks and forms. For our approximately 4,600 financial institution
customers, Deluxe offers industry-leading programs in data analytics,
customer acquisition and treasury management solutions, fraud prevention
and profitability solutions, as well as checks. Deluxe is also a leading
provider of checks and accessories sold directly to consumers. For more
information, visit us at www.deluxe.com,www.facebook.com/deluxecorp
or www.twitter.com/deluxecorp.

Forward-Looking Statements

Statements made in this release concerning Deluxe, “the Company’s” or
management’s intentions, expectations, outlook or predictions about
future results or events are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements reflect management’s current intentions or beliefs and are
subject to risks and uncertainties that could cause actual results or
events to vary from stated expectations, which variations could be
material and adverse. Factors that could produce such a variation
include, but are not limited to, the following: the impact that a
deterioration or prolonged softness in the economy may have on demand
for the Company’s products and services; the inherent unreliability of
earnings, revenue and cash flow predictions due to numerous factors,
many of which are beyond the Company’s control; declining demand for the
Company’s checks and check-related products and services and business
forms; risks that the Company’s strategies intended to drive sustained
revenue and earnings growth, despite the continuing decline in checks
and forms are delayed or unsuccessful; intense competition in the check
printing business; continued consolidation of financial institutions
and/or additional bank failures, thereby reducing the number of
potential customers and referral sources and increasing downward
pressure on the Company’s revenue and gross profit; the risk that
pending and future acquisitions will not be consummated within the
expected time periods or at all; risks that the Company’s recent
acquisitions do not produce the anticipated results or synergies; risks
that the Company’s cost reduction initiatives will be delayed or
unsuccessful; performance shortfalls by one or more of the Company’s
major suppliers, licensors or service providers; unanticipated delays,
costs and expenses in the development and marketing of products and
services, including web services, financial technology and treasury
management solutions; the failure of such products and services to
deliver the expected revenues and other financial targets; risks related
to security breaches, computer malware or other cyber-attacks; risks of
interruptions to our website operations or information technology
systems; risks of unfavorable outcomes and the costs to defend
litigation and other disputes; and the impact of governmental laws and
regulations. Our forward-looking statements speak only as of the time
made, and we assume no obligation to publicly update any such
statements. Additional information concerning these and other factors
that could cause actual results and events to differ materially from the
Company’s current expectations are contained in the Company’s Form 10-K
for the year ended December 31, 2018.

Diluted EPS Reconciliation

We believe that Adjusted Diluted EPS provides useful comparable
information for investors by excluding the impact of items that we
believe are not indicative of ongoing operations. It is reasonable to
expect that one or more of these excluded items will occur in future
periods, but the amounts recognized can vary significantly. The
presentation below is not intended as an alternative to results reported
in accordance with generally accepted accounting principles (GAAP) in
the United States of America. Instead, we believe that this information
is a useful financial measure to be considered in addition to GAAP
performance measures. During the first quarter of 2019, we modified our
presentation of Adjusted Diluted EPS. Management determined that
excluding additional items, such as acquisition amortization,
share-based compensation expense, certain legal-related expenses and
gain on sales of businesses and customer lists, when calculating this
non-GAAP measure would be helpful in analyzing our results. Revised
amounts for 2018 are presented below.

Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) and Adjusted EBITDA are not GAAP financial performance
measures. We disclose EBITDA and Adjusted EBITDA because we believe
they are useful in evaluating our operating performance compared to
that of other companies, as the calculation eliminates the effect of
interest expense, income taxes, the accounting effects of capital
investments (i.e., depreciation and amortization) and in the case of
Adjusted EBITDA, certain items, as presented below, that may vary
for companies for reasons unrelated to overall operating
performance. We believe that measures of operating performance that
exclude these impacts are helpful in analyzing our results. In
addition, management utilizes Adjusted EBITDA to assess the
operating results and performance of the business, to perform
analytical comparisons and to identify strategies to improve
performance. We also believe that an increasing EBITDA and Adjusted
EBITDA depict increased ability to attract financing and an increase
in the value of our business. We do not consider EBITDA and Adjusted
EBITDA to be measures of cash flow, as they do not consider certain
cash requirements such as interest, income taxes or debt service
payments. We do not consider EBITDA or Adjusted EBITDA to be
substitutes for operating income or net income. Instead, we believe
that EBITDA and Adjusted EBITDA are useful performance measures that
should be considered in addition to GAAP performance measures. Note
that our calculation of Adjusted EBITDA differs from the amount
reported in the prior year as management determined that excluding
additional items when calculating this non-GAAP measure would
improve comparability between periods and to other companies. EBITDA
and Adjusted EBITDA are derived from net income as follows:

Quarter Ended March 31,

2019

2018

Net income

$41.2

$63.3

Interest expense

9.3

5.6

Income tax provision

15.0

20.1

Depreciation and amortization expense

32.4

31.1

EBITDA

97.9

120.1

Restructuring and integration costs

6.3

2.3

CEO transition costs

5.5

—

Share-based compensation expense(2)

3.3

3.0

Asset impairment charges

—

2.1

Acquisition transaction costs

0.2

0.5

Certain legal-related expense(2)

0.4

0.3

Loss (gain) on sales of businesses and customer lists(2)

0.1

(7.2

)

Loss on debt retirement

—

0.5

Adjusted EBITDA

$113.7

$121.6

(2)

Additional non-GAAP adjustment in 2019 under our revised calculation.

DELUXE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)

(Unaudited)

March 31, 2019(1)

December 31, 2018

March 31,2018

Cash and cash equivalents

$61.5

$59.7

$67.7

Other current assets

369.6

390.4

332.2

Property, plant & equipment-net

89.9

90.3

82.7

Operating lease assets

48.5

—

—

Intangibles-net

339.7

360.0

393.9

Goodwill

1,160.8

1,160.6

1,161.3

Other non-current assets

252.4

244.1

236.0

Total assets

$2,322.4

$2,305.1

$2,273.8

Total current liabilities

$356.4

$392.0

$375.6

Long-term debt

946.0

911.1

741.7

Non-current operating lease liabilities

36.1

—

—

Deferred income taxes

49.6

46.7

56.7

Other non-current liabilities

36.7

39.9

48.1

Shareholders’ equity

897.6

915.4

1,051.7

Total liabilities and shareholders’ equity

$2,322.4

$2,305.1

$2,273.8

Shares outstanding

43.6

44.6

47.8

(1)

Effective January 1, 2019, we adopted Accounting Standards Update
(ASU) No. 2016-02, Leasing, and related amendments. Adoption of
these standards resulted in an increase in total assets of $49.8
million, an increase in total liabilities of $50.1 million and a
decrease in shareholders’ equity of $0.3 million as of January 1,
2019. Prior periods were not restated. Adoption of these standards
does not have a significant impact on our consolidated statements of
income or on our consolidated statements of cash flows.

Cash, cash equivalents, restricted cash and restricted cash
equivalents, end of period

$138.5

$146.5

Free cash flow(2)

$30.8

$66.8

(1)

Prior period amounts have been revised to correct a prior period
misstatement. We corrected the prior period to reflect the guidance
outlined in ASU No. 2016-18, Restricted Cash. This revision was not
material to previously issued consolidated statements of cash flows
and had no impact on previously reported amounts for net cash
provided by operating activities or net cash used by investing
activities.

(2)

Free cash flow is calculated as net cash provided by operating
activities less purchases of capital assets. We believe that free
cash flow is an important indicator of cash available for debt
service and for shareholders, after making capital investments to
maintain or expand our asset base. Free cash flow is limited and not
all of our free cash flow is available for discretionary spending,
as we may have mandatory debt payments and other cash requirements
that must be deducted from our cash available for future use. Free
cash flow is not a substitute for GAAP liquidity measures. Instead,
we believe that this measurement provides an additional metric to
compare cash generated by our operations on a consistent basis and
to provide insight into the cash flow available to fund such things
as share repurchases, dividends, mandatory and discretionary debt
reduction and acquisitions or other strategic investments.

DELUXE CORPORATION

SEGMENT INFORMATION

(In millions)

(Unaudited)

Quarter EndedMarch 31,

2019

2018

Revenue:

Small Business Services

$313.1

$316.3

Financial Services

154.4

140.6

Direct Checks

31.6

35.0

Total

$499.1

$491.9

Operating income:

Small Business Services

$44.7

$58.9

Financial Services

10.3

18.0

Direct Checks

8.8

10.8

Total

$63.8

$87.7

Operating margin:

Small Business Services

14.3

%

18.6

%

Financial Services

6.7

%

12.8

%

Direct Checks

27.8

%

30.9

%

Total

12.8

%

17.8

%

The segment information reported here was calculated utilizing the
methodology outlined in the Notes to Consolidated Financial Statements
included in our Annual Report on Form 10-K for the year ended December
31, 2018.

The table below is provided to assist in understanding the comparability
of the Company’s results of operations for the quarters ended March 31,
2019 and 2018. We disclose adjusted operating income because we believe
it is useful to evaluate our operating performance excluding certain
items which may vary for reasons unrelated to overall operating
performance. During the first quarter of 2019, management determined
that excluding additional items when calculating adjusted operating
income would be helpful in analyzing our results. As such, adjusted
operating income by segment reported in the prior year has been revised.
The excluded items include asset impairment charges, acquisition
amortization, restructuring and integration costs, CEO transition costs,
share-based compensation expense, acquisition transaction costs, certain
legal-related expense and gain or loss on sales of businesses and
customer lists. It is reasonable to expect that one or more of these
excluded items will occur in future periods, but the amounts recognized
can vary significantly from period to period and may not directly relate
to the Company’s ongoing operations. The presentation below is not
intended as an alternative to results reported in accordance with GAAP.
Instead, we believe that this information is a useful financial measure
to be considered in addition to GAAP performance measures.